The founders of legal expenses insurer Motorplus have been ordered by the High Court to repay the entire sale price of the company of almost £2.4m for breaching warranties.
Mrs Justice Cockerill said investment company 116 Cardamon, which owns medical reporting firm Speed Medical among others, bought Motorplus – which traded as ULR Additions – in 2014 from Alan and Birgitt MacAlister.
Motorplus, which now trades as Coplus, also provides claims handling and first notification of loss services to underwriters.
The judge said counsel for Cardamon said the company now realised Motorplus had been “effectively insolvent” and “worthless” at the time of purchase.
Counsel for Cardamon said it had advanced “sizeable sums” of over £1m to keep Motorplus afloat, and its claim against the MacAlisters would have been larger if it had not been limited by the share purchase agreement to the sale price.
Cockerill J said the sale of Motorplus was concluded “without any due diligence” being performed, “at least in part because the existing management team were working on obtaining finance for a management buy-out and there was a desire not to alert them until the sale was due to complete”.
The judge went on: “Mr MacAlister indicated in correspondence that Cardamon’s willingness to buy the company without due diligence was ‘the reason I offered the company at a discount’.”
Cockerill J said there was a further reason why the sale had to agreed quickly. The MacAlisters owed Motorplus almost £1.3m through a directors’ loan, which needed to be repaid to avoid additional tax.
It was agreed that the purchase price would be paid partly in cash and partly through discharging the liability of the Motorplus founders for the loan.
Delivering judgment in 116 Cardamon v MacAlister  EWHC 1200 (Comm), Cockerill J said the basis of Cardamon’s claim was that the MacAlisters warranted the “truth, fairness, accuracy and proper preparation” of the company’s accounts for the year ending 31 August 2013.
They also warranted that the management accounts to 30 April 2014 “fairly represented the assets and liabilities and the profits and losses of the company as at the date when they were prepared”.
The judge said that “contrary to the picture” presented by the accounts, Cardamon argued that Motorplus was “effectively insolvent”, particularly because the accounts understated the company’s liability to pay claims under FamilyPlus, a book of before-the-event legal expenses insurance business.
The judge said FamilyPlus claims identified at February 2014 totalled almost £3.5m, compared to the £1.03m actually provided for, leaving a deficit of £2.45m.
She said this amounted to under-provision of 236%, reduced to 144% when payments were stripped out.
“The picture which I receive from this information is of an accurate start point in 2010, with gradually worsening approach to reserving over the next three years. One would therefore expect the 144% mistake in 2013 to be preceded by smaller but increasing percentage errors.”
Cockerill J concluded “on the balance of probabilities and doing my best with the evidence presented to me”, that the error was 48% in 2011 and 96% in 2012.
There was also a failure to disclose a change in the method of remunerating insurance brokers, which occurred during the 2013 financial year, and allowed Motorplus to “defer accounting for a large amount of this expense”, giving its accounts “an unduly rosy look”.
The judge found that, although there had been breaches of warranty in relation to brokers’ remuneration, this part of Cardamon’s claim failed because it was time-barred.
The judge concluded that warranties had been breached in relation the liability of Motorplus to pay claims under FamilyPlus.
Although the damages payable to Cardamon were subject to the contractual cap limiting them to the purchase price, they were not subject to any further reductions.
Motorplus set up the alternative business structure LEI Legal Services in July 2013 to handle small claims. Following the purchase of Motorplus by Cardamon, the closure of LEI was announced in June 2015.